Why the Rich Get Richer and the Poor Get Poorer

An investment in knowledge pays the best interest. – Benjamin Franklin

The secret is a simple one: Education. I’m not talking about going to Harvard or some elite university. I’m not even talking about a Masters or a PhD degree. I’m talking about fiscal education. The rich are rich because they know how to manage money. They know how to put it to work and make it grow. By contrast, the poor know only debt. How to get into debt and how to get deeper into debt. Money management is taught in the school of life, not the universities.

The rich and poor just think differently about money. The rich think in terms of assets and liabilities. It’s one of the few enlightening things Robert Kyosaki has said in all his books and seminars: Assets put money into your pocket, liabilities take money out of your pocket.

The poor buy things they cannot afford with money they have yet to earn and focus on low monthly payments, ignoring the aggregate cost of the interest over the life of the loan.

The rich buy things they can pay for outright with the money they have saved or generated from their streams of passive income. When they do take out loans, they are for things that have a greater return than the cost of the loan. The rich take loans to start personal businesses that yield tax advantages and returns on that money that a large screen HDTV bought on a credit card at 19% interest doesn’t provide.

Most of those considered rich in America earned their wealth. Only 3% inherited it. Some fall into it, but never really learn to manage it. I’m thinking of celebrities like M. C. Hammer, or Ed McMahon. The vast majority of Millionaires are small business owners, or investors.

Look at Warren Buffet. He is one of the richest men in the world and he started from humble beginnings. He was not born into wealth, but he was born into a family that provided him with the essential element to becoming wealthy: knowledge. His father was a stock broker, and Warren learned to think about money the way the rich do at an early age.

He mowed lawns and did odd jobs to generate earned income, and later put that money towards stock investments. He made mistakes early on, but he learned from them and started his own investment company and continued acquiring assets instead of liabilities. The rest is history.

Contrast that with any number of people you may have grown up with, or may work with or come across in other aspects of your life. The working poor.

I have a friend who lives alone and makes a fair wage. He’s consumed with consumerism. He spends most of his discretionary income on liabilities: Computer games, iPods, dinners and movies out, a cup of Starbucks every morning, a new car. I was guilty of this myself at one point. Then I started educating myself and it changed my entire view of money. Instead of thinking of that new PC game as “only $50”, I began to think of it as 1 share of Coke-A-Cola that would pay me dividends. No computer game would do that. I started thinking about the price of items in terms of stock price, yield and future return, instead of just the dollar cost of the item today. I saw all that “stuff” as something that would take my money instead of growing my money.

Here’s another secret of the rich: They work for passive income instead of earned income. Earned income requires direct effort to acquire, and is taxed higher than investment income. Factor in favorable tax treatment for owning a business and you have a much greater chance of building wealth.

Rich and poor are both states of mind as much as a state of finances. Which state would you rather be in?

11 Responses to Why the Rich Get Richer and the Poor Get Poorer

I don’t think it’s that simple any more. Education doesn’t explain why corporate profits are as high as they have ever been, but the wages of the average worker have actually declined. For the first time in history, the wealth isn’t being shared. If you REALLY want to know why the rich are getting richer, you have to read “Supercapitalism.”

The wealthy also have greater ability to take risk and greater access to investing. They can lose money without worrying about retirement. Transaction fees are insignificant and they can meet minimum investment requirements easily.

I thought your article was really good and truthful. Another thing about the wealthy, they are frugal. It’s the “affluent poor” that spend all their time and money trying to look rich, but don’t have a pot to piss in or a window to throw it out of.

As a “poor” woman I thought I would weigh in. I am “poor” because my income is very low and my assets are meager. However, I don’t have rent or a mortgage payment. I don’t pay much for gas because I have a 50cc scooter. I don’t have to pay much for “business clothes” because I work at home. I don’t pay for day care because I work at home. I own every thing and only owe because I decided to get a degree, a degree which so far can’t even pay for itself. I thought it was a good investment. Apparently people need a B.A. to be an administrative assistant.

My point is, many “poor” like me are in rural areas trying to figure out passive incomes. I have the whole small business, self employed thing down pat. I know it inside out and can support my family of 7 frugally on it. I admit to wishing I could a afford a higher life style, but I never expect to. For right now my goal is to finish nursing school while working at home full time and home schooling 5 kids. I have done all of this with only medical help for the kids from the state. I also homestead.

The “poor” folks like me are few around here because of “dignity”. Apparently it is undignified to drive a scooter. It is also undignified to work for ones self. I don’t know what kind of dignity a person can have with 2 100k mortgages, a 20k loan for a car, 40k in school loans, and 10k in credit card debt. I only have 30k in school loans and I feel like I am drowning. So don’t assume all poor people buy plastic consumable crap. The only “crap” I bought in the past 24 months was a Zen, so I have music to work out to. It was 80 bucks and has proven invaluable in lowering my blood pressure, cholesterol, and weight. I would say cheaper than the 50 bucks a pop to see the doc every week. *I won’t work out with out good tunes.* The money I “waste” is spent on political campaigns, services I donate to in order to keep them up such as certain websites, and religious affiliation items. This could be seen as a waste on a budget as tight as mine, but I feel everyone should chip in a buck or two to help keep what they love going.

Might I send you to a 130 year old book called Progress & Poverty, which details the peculiar fact that, despite awesome technological progress in the first 100 years of America’s history, America in 1880 had huge poverty in its cities. The author, Philadelphia-born Henry George, sought the root of the problem.

The book was the #2 best seller of the 1880s, second only to the Bible. It was widely serialized, widely discussed, translated into 30 or so languages.

A modern abridgement is available online at progressandpoverty.org or from Amazon (search on Henry George Bob Drake progress poverty)

No amount of education that doesn’t include an understanding of HG’s ideas is going to reduce poverty by even a tiny fraction.

We tolerate, even are proud of, a machine that shovels our wealth into the pockets of a lucky few who own our natural resources and our most valuable urban land. And we treat them as if they are doing something for us, rather than the rest of us working for their benefit!

HG proposes a simple alternative.

You might explore wealthandwant.com for more about these ideas. (Search the front page of the last one for “wealth distribution” if you can bear to see the details: 1% of us have 33% of our wealth; the next 4% have 24%, leaving 43% for the other 95% of us. Their wealth — much of it in the form of ownership of natural resources and super-valuable urban land — is a rent-seeking machine. Those of us who dutifully play by the rules simply enrich them. Poor rules!

Being in the field of helping others having problems with their personal finances for nearly 35 years I believe Joe has hit the nail on the head.

When I read terms like Capitalism or in this case Super Capitalism I have a real problem with it because the alternative is Socialism, a concept I will never embrace.

We make our decisions starting at an early age. Most of us make mistakes along the way. In many cases we have to live with those decisions, good or bad.

Corporate profits are high because somebody is doing something right. They are selling and we are buying what they sell. Who profits? The shareholders of that company. People like you and me that have investments, no matter how small, through programs like our 401k.

One other area that bothers me is this push to tax, regulate or penalize companies just because we think they are too rich. This is like cutting off your nose to spite your face.

When we add expenses of any kind of a company, guess who pays. You and me. They simply hike the price of the item to cover the extra cost. Just good business.

Being in this business as long as I have I also know that circumstances plays a part in your financial situation. But, that is the exception rather than the rule.

It’s proven day after day that when we change the way we think about our money good things happen. Don’t stop educating yourself!